Fair Value Measurements

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis at September 30, 2016, December 31, 2015 and September 30, 2015:



(in thousands)	September 30, 2016
Assets (liabilities)	Level 1			Level 2			Level 3		Total
Cash equivalents	$	—		$	—		$	—	$	—
Restricted cash	190			—			—		190
Commodity derivatives, net (a)	34,620			(35,161		)	—		(541		)
Provisionally priced contracts (b)	(79,022		)	(20,500		)	—		(99,522		)
Convertible preferred securities (c)	—			—			3,294		3,294
Other assets and liabilities (d)	11,015			(4,774		)	—		6,241
Total	$	(33,197	)	$	(60,435	)	$	3,294	$	(90,338	)



(in thousands)	December 31, 2015
Assets (liabilities)	Level 1			Level 2			Level 3		Total
Cash equivalents	$	26,931		$	—		$	—	$	26,931
Restricted cash	450			—			—		450
Commodity derivatives, net (a)	26,890			(15,101		)	—		11,789
Provisionally priced contracts (b)	(133,842		)	(103,148		)	—		(236,990		)
Convertible preferred securities (c)	—			—			13,550		13,550
Other assets and liabilities (d)	8,635			(3,324		)	350		5,661
Total	$	(70,936	)	$	(121,573	)	$	13,900	$	(178,609	)



(in thousands)	September 30, 2015
Assets (liabilities)	Level 1			Level 2			Level 3		Total
Cash equivalents	$	16,121		$	—		$	—	$	16,121
Restricted cash	181			—			—		181
Commodity derivatives, net (a)	34,337			(24,611		)	—		9,726
Provisionally priced contracts (b)	(81,037		)	(54,612		)	—		(135,649		)
Convertible preferred securities (c)	—			—			12,800		12,800
Other assets and liabilities (d)	10,814			(4,010		)	350		7,154
Total	$	(19,584	)	$	(83,233	)	$	13,150	$	(89,667	)


(a)	Includes associated cash posted/received as collateral


(b)	Included in "Provisionally priced contracts" are those instruments based only on underlying futures values (Level 1) and delayed price contracts (Level 2)


(c)	Recorded in “Other noncurrent assets” on the Company’s Condensed Consolidated Balance Sheets


(d)	Included in other assets and liabilities are deferred compensation assets, ethanol risk management contracts, and foreign exchange derivative contracts (Level 1), interest rate derivatives (Level 2), and contingent consideration to the former owners of Kay Flo Industries, Inc (Level 3).

Level 1 commodity derivatives reflect the fair value of the exchange-traded futures and options contracts that the Company holds, net of the cash collateral that the Company has in its margin account.

The majority of the Company’s assets and liabilities measured at fair value are based on the market approach valuation technique. With the market approach, fair value is derived using prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

The Company’s net commodity derivatives primarily consist of futures or options contracts via regulated exchanges and contracts with producers or customers under which the future settlement date and bushels (or gallons in the case of ethanol contracts) of commodities to be delivered (primarily wheat, corn, soybeans and ethanol) are fixed and under which the price may or may not be fixed. Depending on the specifics of the individual contracts, the fair value is derived from the futures or options prices on the CME or the New York Mercantile Exchange for similar commodities and delivery dates as well as observable quotes for local basis adjustments (the difference, which is attributable to local market conditions, between the quoted futures price and the local cash price). Because basis for a particular commodity and location typically has multiple quoted prices from other agribusinesses in the same geographical vicinity and is used as a common pricing mechanism in the Agribusiness industry, we have concluded that basis is a Level 2 fair value input for purposes of the fair value disclosure requirements related to our commodity derivatives. Although nonperformance risk, both of the Company and the counterparty, is present in each of these commodity contracts and is a component of the estimated fair values, based on the Company’s historical experience with its producers and customers and the Company’s knowledge of their businesses, the Company does not view nonperformance risk to be a material input to fair value for these commodity contracts.

These fair value disclosures exclude physical grain inventories measured at net realizable value. The net realizable value used to measure the Company’s agricultural commodity inventories is the fair value (spot price of the commodity in an exchange), less cost of disposal and transportation based on the local market. This valuation would generally be considered Level 2. The amount is disclosed in Note 2 Inventories. Changes in the net realizable value of commodity inventories are recognized as a component of cost of sales and merchandising revenues.

Provisionally priced contract liabilities are those for which the Company has taken ownership and possession of grain but the final purchase price has not been established. In the case of payables where the unpriced portion of the contract is limited to the futures price of the underlying commodity or we have delivered provisionally priced grain and a subsequent payable or receivable is set up for any futures changes in the grain price, quoted CBOT prices are used and the liability is deemed to be Level 1 in the fair value hierarchy. For all other unpriced contracts which include variable futures and basis components, the amounts recorded for delayed price contracts are determined on the basis of local grain market prices at the balance sheet date and, as such, are deemed to be Level 2 in the fair value hierarchy.

The risk management contract liability allows related ethanol customers to effectively unprice the futures component of their inventory for a period of time, subjecting the bushels to market fluctuations. The Company records an asset or liability for the market value changes of the commodities over the life of the contracts based on quoted CBOT prices and as such, the balance is deemed to be Level 1 in the fair value hierarchy.

The Company’s stake in the Iowa Northern Railway Company ("IANR") was redeemed in the first quarter of 2016. The remaining convertible preferred securities are interests in two early-stage enterprises in the form of debt securities with the possibility of conversion to equity under certain circumstances.

A reconciliation of beginning and ending balances for the Company’s fair value measurements using Level 3 inputs is as follows:



(in thousands)	2016			2015		2016			2015
	Contingent Consideration			Contingent Consideration		Convertible Securities			Convertible Securities
Asset (liability) at January 1,	$	(350	)	$	—	$	13,550		$	13,300
Gains (losses) included in earnings	190			—		710			—
Sales proceeds	—			—		(13,485		)	—
Asset (liability) at March 31,	$	(160	)	$	—	$	775		$	13,300
Gains (losses) included in earnings	160			—		19			—
New agreements	—			350		2,500			—
Asset (liability) at June 30,	—			350		3,294			13,300
Sales proceeds	—			—		—			(992		)
Realized gains (losses) included in earnings	—			—		—			492
Asset at September 30,	$	—		$	350	$	3,294		$	12,800

The following tables summarize quantitative information about the Company's Level 3 fair value measurements as of September 30, 2016, December 31, 2015 and September 30, 2015:



Quantitative Information about Level 3 Fair Value Measurements
(in thousands)	Fair Value as of September 30, 2016		Valuation Method	Unobservable Input	Weighted Average
Convertible Notes	$	3,294	Cost basis plus interest	N/A	N/A



(in thousands)	Fair Value as of December 31, 2015		Valuation Method	Unobservable Input	Weighted Average
Convertible Preferred Securities	$	12,800	Market Approach	EBITDA Multiples	5.6
			Income Approach	Discount Rate	14.5	%

Convertible Notes	$	750	Cost basis plus interest	N/A	N/A



(in thousands)	Fair Value as of September 30, 2015		Valuation Method	Unobservable Input	Weighted Average
Convertible Preferred Securities	$	12,800	Market Approach	EBITDA Multiples	5.535
			Income Approach	Discount Rate	14.5	%

Fair Value of Financial Instruments

The fair value of the Company’s long-term debt is estimated using quoted market prices or discounted future cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. As such, the Company has concluded that the fair value of long-term debt is considered Level 2 in the fair value hierarchy.



(in thousands)	September 30, 2016		December 31, 2015		September 30, 2015
Fair value of long-term debt, including current maturities	$	458,268	$	467,703	$	448,298
Fair value in excess of carrying value	7,714		3,708		8,040

The fair value of the Company’s cash equivalents, accounts receivable and accounts payable approximate their carrying value as they are close to maturity.